AUTONOMOUS VEHICLES (AVs) have the potential to revolutionize personal mobility. To accelerate this future, the automotive industry has entered into an intense era of collaboration among carmakers, technology giants, software start-ups, research institutions, telecom providers, insurance companies, and others to develop and commercialize the technology, share risk, and prepare the market. Numerous partnerships have sprouted up in the past year, adding density and life to this ecosystem. General Motors invested $500 million in Lyft, expanded its R&D with Honda, Volkswagen, and Mobileye, and assembled a dedicated new team of senior AV engineers. Ford Motor teamed up with Google, AT&T, Amazon, and began promulgating its SmartDeviceLink open-source software. Toyota Motor expanded its five-year telematics partnership with Microsoft and invested $1 billion into R&D, including funds for two new AV research centers next to Stanford and MIT.
This budding era of partnership activity is no coincidence.
Partnerships have long been a go-to mechanism for developing and commercializing new products in highly-dynamic markets experiencing technological convergence. The self-driving car sector is the latest example of how partnerships are driving cross-industry pollination and disruption. As such, they are becoming an important determinant of the AV industry’s configuration, competitive dynamics, pace of change – and ultimately its fate.
INVENTORY AND ANALYSIS OF AV PARTNERSHIP DEALS
The rationale for deals between carmakers and technology companies is pretty straightforward. Carmakers contribute automotive design, testing, manufacturing, assembly, sales, service expertise, and infrastructure including dealership networks – all of which are out-of-reach for a technology company to deliver, absent a major acquisition. Technology companies, on their part, are positioned to develop and contribute self-driving software, GPS mapping systems, telematics, data science, network security, and related functions. Further, technology companies are insulated from the automotive industry’s short-term product development cycle, customer influence, and labor politics, which affords them the space necessary to experiment with and gradually invent self-driving software over a long-term time horizon.
In an effort to chronicle the voyage of carmakers and technology companies in this rapidly evolving space, Water Street Partners has begun tracking and cataloging AV partnership activity and conducting applied analysis of partnership strategies and their economic implications. This is the first in a series of articles that will seek to inventory and explain existing and potential partnerships. Future articles will expand on this inventory, share some lessons learned, and compare the AV partnership structures and ecosystem with other industries that have used partnerships to drive radical technology innovation and market commercialization.
Our database of AV industry partnerships shows that major carmakers and large tech firms are assembling numerous partnerships within this arena. Taking an integrative view – one that blends partner type, deal rationale, transaction structure, value chain, and other elements – our analysis shows that the sector’s partnerships fall into six models:
- Partnership of carmaker and technology firm. Carmakers and technology firms are partnering to combine complementary capabilities that will accelerate the development of AV components and software – particularly a commercially viable self-driving software. Alliances are being structured as R&D partnerships, joint development agreements, or joint ventures. The Ford-Google joint venture is seeking to equip Ford self-driving cars with Google self-driving software, thus delivering an end-to-end AV product and go-to-market strategy. It is being structured as an independent JV to ring-fence the considerable liabilities associated with self-driving software. Other carmaker-tech firm partnerships are more narrowly scoped – for instance, to co-develop a specific component or sub-system. The five-year Toyota-Microsoft partnership is consolidating the carmaker’s global research in telematics, data analytics, and network security services to develop connected-car technologies. Smaller software developers are more likely to be involved with component software design, rather than self-driving software. In another example, GM, VW, and Mobileye (a vision-based, driver-assistance systems company) partnered to launch a crowd-sourced mapping technology for AVs.
- Partnership of two or three carmakers. Carmakers are also collaborating with each other – mostly by expanding ongoing collaborations, where they exist – to jointly develop AV models and select connected-car technologies. These collaborations tend to be structured as R&D partnerships or joint development agreements but may also be through joint ventures. For example, the GM-Honda R&D partnership is considering expanding the scope of joint R&D activities from hydrogen fuel cells to self-driving technology, IT, and electrification. Similarly, the Daimler-Renault-Nissan alliance is expanding its electric vehicle (EV) manufacturing collaboration to also explore AVs and related technologies. As a general rule, these automaker-to-automaker partnerships are less likely to take on developing the underlying self-driving software, unless one of the partners has acquired a tech firm.
- Partnership of carmaker and ride-sharing firm. Carmakers are also partnering with ride-hailing and car-sharing firms, and occasionally acquiring smaller software developers to develop AV back-end capabilities and software. For example, GM invested $500 million to co-develop the concept of AV fleets for use by ride-hailing service Lyft and, in tandem, formed a short-term car rental JV to supply Lyft drivers with quality, affordable GM connected cars. In some cases, the ride-hailing firms are taking the initiative to partner on AV technology themselves – e.g., Uber sought out Warren Buffet’s portfolio company BYD to test BYD electric cars in the United States.
- Partnership with academic or government institution. Technology firms are not the only organizations with deep technology, data science, telematics, and related expertise – and the automotive industry certainly isn’t the only industry interested in advanced automation software. Many academic and government research institutions share mutual interest in autonomous technologies and possess similar capabilities as technology companies (but different ambitions). Some carmakers are starting to tap these organizations for technical expertise through R&D partnerships or joint development agreements. Toyota seeded a five-year $1 billion investment in Toyota Research Institute, which plans to establish AV technology research centers near Stanford University and MIT. Nissan partnered with NASA’s Ames Research Center to modify electric-powered Nissan Leafs to enhance their autonomous features. Non-carmakers are partnering up too. For example, Uber formed an R&D partnership with Carnegie Mellon University to develop AV driving technology.
- Partnership of suppliers and other suppliers or carmakers. Automotive suppliers are naturally positioned to adapt key components for connected-car applications, and partnering with other suppliers or carmakers can help to facilitate their learning curve or consolidate their supply position for high-margin AV components. For example, Autoliv is developing an ecosystem of AV technologies and connected-car capabilities. It formed a consolidation JV that combines Autoliv’s brake business with a carve-out of Nissin Kogyo’s brake business to expand safety system capabilities and develop new braking technologies (e.g., brake control and brake apply systems) for AV applications. Other Autoliv components are contributing to autonomous features in cars like Daimler AG’s new Mercedes-Benz E class, which can steer itself in auto-pilot mode, brake in emergencies, and evade obstructions. Autoliv is also partnering with Volvo in a project called Drive Me that seeks to pilot 100 self-driving cars on the roads of Gothenburg, Sweden by 2017.
- Industry consortiums. There are at least two types of carmaker consortiums: 1) standard-setting consortiums, and 2) multi-party platform JVs. In standard-setting consortiums, multiple carmakers voluntarily participate in a non-equity alliance to drive technological convergence around a common standard, platform, or system, which all parties agree to use. Over time, these consortiums can grow large – with five, ten, even fifteen partners or more. For example, Ford is developing SmartDeviceLink as an open source in-car entertainment and navigation system software that connects dashboards with smartphones and is attempting to license the software to other carmakers. Toyota has committed to Ford’s software – PSA Peugeot Citroën, Mazda, Honda, Subaru are also actively considering. In a multi-party platform JV, by contrast, parties take equity stakes in a joint venture to develop a shared utility platform, which can sell its services back to the owners, or other business, or both. The German automakers Daimler, BMW, and Audi formed a joint venture to acquire digital mapping service HERE. The JV owners are seeking to sell minority stakes to Amazon and Microsoft.
In the race to develop and commercialize AVs, most companies have adopted a multi-pronged strategy, involving partnerships and in-house R&D investment. But there are a couple notable exceptions. Tesla appears to be building all-inclusive AV capabilities under one roof – from auto manufacturing, to AV software, to data science and connected-car technologies. Done right, this strategy would allow Tesla to capture certain benefits associated with an integrated AV value chain. It would also position Tesla, with its unparalleled electric vehicle (EV) expertise, to lead the convergence of EVs and AVs – an eventuality that many industry experts believe will drive a second wave of industry innovation. Apple also appears to be going-it-alone thus far. Although the exact scope of “Project Titan” remains shrouded in secrecy, the company has been busy assembling a deep bench of AV industry experts, which suggests it’s developing an end-to-end AV solution. And with +$200 billion in cash reserves – enough to acquire Daimler twice over – the company remains uniquely positioned to exploit M&A if a best-in-class AV solution emerges.
CAUTION: SLIPPERY WHEN WET
Make no mistake: While partnerships are driving innovation and commercialization across the self-driving car sector, these are not inherently stable ventures. There are at least three basic sources of this structural instability....